A press launch issued on 2 August 2024 confirmed that 72% of taxpayers who filed their returns by 31 July 2024 selected the brand new tax regime, up from 67 % in FY23. Whereas it’s heartening to see nearly all of taxpayers transferring to the brand new regime, there’s been a marginal enhance of 5 proportion factors in FY24 from the 12 months earlier than.
Whereas the simplified submitting course of and decrease tax charges are interesting, 28 % of taxpayers nonetheless most well-liked the previous tax regime on account of its useful deductions and exemptions resembling investments within the Public Provident Fund and the Nationwide Pension System, home hire allowance, go away journey allowance, and housing mortgage curiosity allowance.
This distinction highlights the differing advantages of the 2 regimes. The brand new tax regime appeals to these with simple funds, whereas the previous tax regime fits people leveraging deductions and exemptions for optimised tax payouts.
The brand new tax regime faces challenges which have hindered its widespread adoption. One of many major points is the dearth of incentives for financial savings, a cornerstone of the previous tax regime, which inspires long-term monetary planning by way of deductions for investments in devices resembling PPF, NPS, and equity-linked financial savings schemes.
In distinction, the brand new tax regime doesn’t present comparable encouragement, making it much less interesting to these accustomed to leveraging tax advantages for wealth accumulation.
Enhancements to think about
With the Union Price range approaching, the main focus shifts to how the federal government would possibly overhaul the brand new tax regime to draw extra taxpayers. To make the brand new tax regime extra attractive, the federal government may contemplate a number of enhancements.
Firstly, rising the usual deduction would supply taxpayers with the next flat deduction, offsetting the advantages of exemptions out there within the previous tax regime. For example, resetting the present commonplace deduction to ₹2 lakh, contemplating inflation, may considerably increase disposable revenue. A slab-based commonplace deduction is also formulated, providing greater commonplace deductions for high-income earners.
Secondly, one other potential measure is revising the tax slabs resembling elevating the brink for the 5% tax charge to ₹5 lakh or extending the ten% slab to ₹15 lakh, thereby easing the burden on middle-income earners. Moreover, adjusting slab charges resembling lowering the 20% charge to fifteen% or reducing the 30% charge for higher-income teams may incentivise taxpayers to change regimes.
These adjustments would handle the issues of these favoring the previous tax regime, putting a steadiness between simplicity and monetary advantages, finally making the brand new tax regime extra aggressive and taxpayer pleasant.
Taxpayers who earn revenue from enterprise or occupation ought to be allowed higher flexibility in selecting their tax regime. Presently, as soon as a taxpayer with enterprise revenue opts into the brand new tax regime, they’re locked into it and might solely swap again to the previous regime as soon as of their lifetime.
Extra flexibility
After switching again, they lose the choice to re-enter the brand new regime once more sooner or later. This restriction ought to be lifted, permitting taxpayers with enterprise revenue to decide into and out of the brand new tax regime with extra flexibility.
This adaptability may be certain that enterprise homeowners can select a tax regime primarily based on adjustments of their revenue patterns, deductions, and total tax planning methods from 12 months to 12 months.
Moreover, to attract taxpayers to the brand new tax regime, the compliance burden could possibly be diminished for particular person and Hindu Undivided Household taxpayers with revenue above ₹50 lakh by enjoyable asset disclosure necessities by elevating reporting thresholds, permitting category-wise aggregation, and exempting low-value private property. This might ease compliance whereas guaranteeing transparency and effectivity.
The brand new tax regime represents a pivotal step towards simplifying tax compliance and fostering a clear fiscal framework. Nonetheless, there’s nonetheless a necessity for strategic recalibration to handle taxpayer issues.
Within the upcoming funds, the federal government has a singular alternative to refine the regime and supply higher incentives to align with the monetary aspirations of taxpayers whereas selling equitable and environment friendly taxation. With daring reforms, this funds may mark a turning level, fostering higher acceptance and shaping a fairer and extra environment friendly income-tax panorama for people in India.
Sandeep Jhunjhunwala is accomplice and Sanjay Kumar is director, Nangia Andersen LLP
